News Focus: Defending spending

For years, the UK’s Ministry of Defence (MoD) and the amount it spends has been a Parliamentarian’s favourite receptacle in which to pour scorn.

And, arguably, it has deserved it. It is, after all, the department that spent billions on two aircraft carriers – the Prince Charles and the Queen Elizabeth – that before they were finished were deemed surplus to current requirements and had their completion delayed for almost a decade, incurring substantial penalty charges in the process.

The National Audit Office (NAO) and the Committee of Public Accounts (PAC) repeatedly report on overspending and the ineffectual management of projects. Responding to the findings of a 2011 report on major projects that concluded it had overspent by £455 million, NAO head Amyas Morse, said: “The MoD has been hampered by a legacy of poor planning and performance on some past projects and the resulting cuts and delays are not value for money.”

While the MoD has made moves to implement changes recommended by these organisations and been tinkered with by successive governments, it has remained relatively distant from the centre. This is largely the result of its nature – a defence force with leaders outside of government. The changes mean sometimes efficiency has gone up, other times it has dropped, but the general picture has remained the same.

In order to really make progress, bolder change may be needed. Towards the end of last year, Bernard Gray, the MoD’s chief of defence materiel, proposed three options for procurement reform:

2. A non-departmental public body, essentially a quango like the Olympic Delivery Authority (ODA), which would have a private-sector delivery partner. Together they would carry out procurement for the MoD.

3. An MoD procurement body that is government owned, but contractor operated (GoCo).

So how do these ideas stack up and what could their impact be? When SM asked the MoD just how it would generate revenues through the trading fund, it was unable to provide any further information. And a defence analyst we spoke to was also at a loss to suggest ways in which it might work.

The two remaining options share similarities. Both outsourcing and the creation of an ODA-like body with a private-sector delivery partner would put procurement in the hands of a new team outside the department. It would be reasonable to expect, judging by past deals, that a private sector provider would be financially incentivised to deliver the right outcomes and if they don’t deliver, that they will be let go. But it’s not quite as simple as that.

Delivery partner model

Certainly the ODA approach has proved successful – it completed a large public construction project on time and under budget. Councils and commercial companies have since copied this approach.

The delivery partner option would enable the MoD to continue to have day-to-day involvement in procurement while taking advantage of the commercial skills and expertise of a private sector partner.

Having two entities with different perspectives could lead to a more rounded consensus on purchasing decisions. On the other hand, it could also cause friction and fall-outs.

And there are differences between the ODA and the MoD that cannot be ignored. The ODA was a newly created organisation with a fixed shelf life and one clear goal that everyone in it could understand and get behind. It was created to work alongside a delivery partner, so everything from the office to the staff and the organisational structure was conceived with that in mind.

The MoD, meanwhile, has a long history and an already established organisational culture that is generally seen as not conducive to change. This difference could have a significant impact on the effectiveness of the model. It could prove a big challenge to get ministry staff to work in synergy with private sector colleagues. Some point to the divided loyalties that already exist between service personnel at the department who continue to identify themselves with their particular force, rather than working for the department as a whole.

That said, bringing in an outside party would shake up existing operations and identify new opportunities. The question is whether such gains could be sustained. Peter Howarth, managing director of procurement consultancy SBV, says: “I’ve seen it in various guises where organisations go out to an outsourced partner, but most have since brought procurement back in house.”

And it’s possible the same issues that dog current procurement operations – politics, bureaucracy, changing requirements - could impact an external provider.

“People often get very gung-ho, thinking they can buy things better than the public sector,” says Howarth, “but when they try, they find they can’t cut through the red tape.”

Outsourcing

Probably the most controversial option is to bring in a contractor to manage procurement, although the government would retain ownership of the function in name.

Of this approach, John Louth, senior research fellow/deputy head, defence, industries and society at the Royal United Services Institute, says: “The benefit of the GoCo relationship is that the government brings in a key partner from industry that has a long-term stake in the success of a particular entity.”

The central factor dictating the effectiveness of this would be the contractor. And the expertise of that contractor would be key.

Louth says: “If they are looking to provide a partner for management of the whole of MoD [procurement], do they want as that key partner people from the industry who have core competencies in design and manufacturing, people who can actually run good portfolios or do they want people who are really good contractors?”

A defence sector contractor would be very strong on the engineering side of things, but may not be so hot on the commercial aspects, whereas an audit and consultancy business would be strong on commercial, but less so on the engineering side.

Of course, the ideas are yet to be fleshed out, so a combination of two providers is very much a possibility. If that is to happen, they need to strike the right balance between operational demands and commercial sense.

There may also be other factors at play prompting a move towards increased collaboration with the private sector. Earlier this month, defence minister Peter Luff said the government would like to use procurement to boost exports of UK defence equipment.

So, assuming the MoD will choose either the delivery partner or government-owned-contractor-operated model, will it solve its procurement problems?

In a recent interview with the BBC, the NAO’s Tim Banfield said the MoD was probably paying the right amount for what it buys. Its flaw was that forecasted costs were unrealistic.

If this is the case, bringing in a greater level of commercial expertise – people who pride themselves on good data and price benchmarking – would stand a strong chance of narrowing the gap between proposed costs and the eventual delivery price.

But when it comes to a sustained shift in the efficiency of the MoD, it’s hard to see a particularly revolutionary change coming about.